Some basic financial literacy everyone should know
Most people don't know this answer. Is interest on your credit card calculated monthly or daily?
If you guessed monthly, for the majority of credit cards, you would be wrong.
How is interest calculated? Let's say you're working on paying of your credit card, and your annual APR is 20%, which in your credit lender's books, would make your daily interest rate roughly 0.0548% on whatever balance you're carrying after your grace period. After making a bill payment, you've still got $1000 left on your balance. On Day 1, the bank will start tacking that daily interest charge to your balance, bringing it to $1005 in their books – even though you'll still see an even $1000. On Day 2, you'll get charged that same daily interest on your new $1005 balance, not just the $1000. That interest will continue to compound each day until you've paid down your balance. Over the year, it equals 22.13% So just like when you pull up to a gas station, and it shows 2.50 in large letters and that 99 in small letters. What the interest rate amounts to is a teaser rate.
Now get this, the average american has $16,048 in credit card debt. Roughly 38% of all house holds carry a credit card balance, and the average interest rate is 15.99% on travel rewards credit cards. Thisinformation is as of September of 2017. Now lets put it into real numbers. If you kept that balance all year long, you would end up paying 17.33% which in dollars and cents is 2,781.96. Considering the average cost of a vacation for a family of four is 4,300. You are essentially giving 2/3 of a vacation away in just interest. Think about
it like that, and you may not pull out your credit card next time to buy that unneeded item.
Have ever made a budget, or analyzed your cash flow? Every dollar you spend should be accounted for so you can see the flow of your capital. Are you spending too much on your cable bill? Are you spending more money on Starbucks every month, than you should? How would you really know unless you build out a budget and see where your cash actually goes. At the end of this chapter is a simple worksheet for you to build a budget. On it you will make a stat line of how much you want to spend in each area of your life, food, coffee, bills, etc, and then actually track your spending and update the actual part of the budget. This will show you how far apart you are from what you think you spend and what you're actually spending. This will create accountability with your income and expenses. If you want you can take it a step further and bring in an accountability buddy that will make sure you stay on track. This could be a family member or friend. With all that extra cash, you could use it to save for retirement or pay down debt.
When is the last time you checked your credit score? Your credit score is by far the most important “score” in your life. It is how banks, credit cards, and even car insurance companies rate you. According to MyFico the difference between a 620 score and a 760 credit score for mortgages is over 150 basis points. On a 300,000 loan that translate to an extra 290 dollars a month! Oh by the way, most mortgages compound monthly.
Unlike your credit report, credit bureaus are not obligated to tell you what your credit score is once a year. I’d recommend using either Credit Karma or Credit Sesame to find your credit score, otherwise known as your VantageScore. You can also pay for a $1 trial at any of the 3 major credit bureau websites (Equifax, Transunion and Experian) but it only lasts 7 days and they automatically re-bill you between $20-$30 a month after the seven days are up.
At the same time, I’d also suggest getting your credit reports from www.AnnualCreditReport.com. If you’re trying to see on your credit score, I’d suggest drawing all three reports at once since they look different for about 90% of people who have used credit in the past.
Below I have included a budget worksheet from the consumer site of the government.
https://www.consumer.gov/sites/www.consumer.gov/files/pdf-1020-make-budget-worksheet_form.pdf
This shows how you can build a budget yourself easy and quickly. If you need any help at all filling it out, please don't hesitate to reach out to me at dperrotto@ceteraadvisors.com
